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A focus on bank lending standards and the upside for our senior secured lending strategy

  • Over the last week we have seen key supporting data points for national housing prices and indications investors are re-joining owner occupiers as new purchasers.
  • The ongoing positive momentum in value for our loan collateral further enhances our perspective that an 8-10% return for senior secured loans continues to be one of the best risk adjusted returns in the investing world.
  • Higher asset values and ongoing investors support, whilst good news for our seasoned loan book, require some consideration of underlying values of new loans written.
  • The RBA has historically raised concerns that low interest rates and rapidly rising house prices could lead to a deterioration in lending standards, a key negative for financial stability and consumer balance sheets. In this context two key data points on the radar are:
    1. House prices: The CoreLogic national Home Value Index rose a further 2.2% in May to be up 10.6% for the year. The rise in housing markets have been broad-based across geography, housing types, and valuation segments, but two trends that were evident throughout 2020 have begun to “normalise”. These include the more recent outperformance in capital city home prices (particularly the large capital cities) compared to regional areas which previously benefited from demographic and COVID-19 related demand shift, as well as the relative outperformance of the most expensive end of the market.
    2. Housing credit growth, including from investors: Housing credit grew 0.5% in April, comprising a 0.6% increase in owner-occupier housing credit and a 0.4% increase in investor housing credit.